Lego CEO Jørgen Vig Knudstorp on leading through survival and growth

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Sometimes a CEO’s most challenging leadership transition is not a matter of switching jobs but of guiding the company onto a new path. Jørgen Vig Knudstorp, a former McKinsey consultant who came to the family-owned Lego Group as an outsider in 2001 and was named CEO in 2004, learned that a series of distinct leadership approaches was needed as he moved the 76-year-old Danish toy maker onto a firmer financial footing, reoriented it toward growth, and opened it to ideas from enthusiastic users.

What leadership approach did you apply to pull Lego back from the brink?

By 2004, when I became CEO, things had gone awfully wrong at Lego Group. To survive, the company needed to halt a sales decline, reduce debt, and focus on cash flow. It was a classic turnaround, and it required tight fiscal control and top-down management. At the same time, I had to build credibility. You can make a lot of things happen if you are viewed without suspicion, so I made sure I was approachable. In Danish, we have an expression that literally translates as “managing at eye level,” but it means being able to talk to people on the factory floor, to engineers, to marketers—being at home with everyone.

And then how did your leadership approach change?

Once the company had gained the freedom to live and have a strategy, the management team set out to optimize the firm’s value. In order to do that, we had to ask, Why does Lego Group exist? Ultimately, we determined the answer: to offer our core products, whose unique design helps children learn systematic, creative problem solving—a crucial twenty-first-century skill. We also decided that we wanted to compete not by being the biggest but by being the best. Implementing a strategy of niche differentiation and excellence required a looser structure and a relaxation of the top-down management style we had imposed during the turnaround because the company needed empowered managers. For example, I stopped participating in weekly sales-management and capacity-allocation choices and pushed decisions as far down the hierarchy as possible.

Now we’re in a third phase, pursuing organic growth. We are growing quite strongly across the world, but to continue building sales volume, we need to change the leadership style yet again, because the company’s management became quite risk averse while focusing on survival. Now it needs to become opportunity driven, which requires taking greater calculated risks. In every phase of strategy change, we have been paving the way by moving leaders within the company and altering organizational structures and ways of working. For example, we set up a business area dedicated to direct-to-consumer sales, which is all about education and collaborative networks and is fundamentally different from selling to retailers, which is all about efficiency.

What form of leadership does the new era of customer participation require?

The Lego community, like the basic interchangeable plastic brick, is one of the company’s core assets. I think I realized the power of customer contributions in 2005, when the company started involving a couple of enthusiastic fans in product development and I started systematically meeting with adult fans of Lego. Since then, we’ve actively encouraged our fans to interact with us and suggest product ideas. An amazing number of grown-ups like to play with Legos. While we have 120 staff designers, we potentially have probably 120,000 volunteer designers we can access outside the company to help us invent. Customers can now even design their own products—which we will sell for them, or in some cases to others, on Legofactory.com, where we offer our digital-design software for free. Perhaps most important, these superusers can articulate the product strengths and weaknesses that young children may sense but can’t express.

Managing user contributors requires corporate transparency and a respect for customers’ ideas. We never take customers’ enthusiasm for granted. We reward them by showing that we listen to and care about their feedback. When I attend fan events, I tell customers that while we can’t implement every idea they propose, such as adding solar cells to Lego Mindstorms robots, the more we hear an idea, the more thought we give to it. I also tell customers that they fulfill another vital role: They are an avenue to the truth. And in today’s world, a CEO needs every avenue to the truth that he or she can find.

A version of this article appeared in the January 2009 issue of Harvard Business Review.